Does Modern Dental Group (HKG:3600) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Modern Dental Group Limited (HKG:3600) does carry debt. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Modern Dental Group Carry?

As you can see below, Modern Dental Group had HK$576.9m of debt at June 2025, down from HK$701.8m a year prior. But it also has HK$595.3m in cash to offset that, meaning it has HK$18.4m net cash.

A Look At Modern Dental Group's Liabilities

According to the last reported balance sheet, Modern Dental Group had liabilities of HK$537.6m due within 12 months, and liabilities of HK$787.7m due beyond 12 months. On the other hand, it had cash of HK$595.3m and HK$824.7m worth of receivables due within a year. So it can boast HK$94.7m more liquid assets than total liabilities.

Having regard to Modern Dental Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the HK$5.38b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Modern Dental Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Modern Dental Group

Also good is that Modern Dental Group grew its EBIT at 16% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Modern Dental Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Modern Dental Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Modern Dental Group produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Modern Dental Group has HK$18.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in HK$520m. So we don't think Modern Dental Group's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Modern Dental Group .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.